Asymmetrical Information

I'm dating myself, but there was an episode of "Barney Miller" where a guy they arrested claimed to be a time-traveler from a near future in which there had been a huge economic crash. He was so convincing that Harris asked him for long-term investment advice, and the guy responded: "Zinc." Seems just as plausible to me as gold....

I'm glad there are gold bugs out there. In 1980 my then employer listened to them and put all his investment money into Homestake mining stock. If he'd taken my advice and bought Intel back then he could have afforded to abandon the business when he lost interest in it a few years later when I was not yet prepared to move on.

There was a good piece about gold in the WSJ this weekend, with an eye-opening chart - the real rate of return of gold has been ZERO since the 1800's, since the price of gold is largely determined by production costs (which grows at roughly the inflation rate.) So, if you invest in gold, your long-term nominal return is the inflation rate. Sort of like TIPS (inflation protected treasury bonds) in reverse.

People can make money by buying/shorting gold when its price is well below/well above the long-term trendline, altough large amounts of patience and a cast-iron stomach are needed. (Who wanted to short gold at $850 when the world was inflating like a balloon in the late 70's?) Right now, the WSJ shows gold to be slightly above its trendline.

Another gold strategy is to exploit the somewhat stable relationship between the price of gold and the price of gold mining stocks - the ratio generally fluctuates between 4 and 5. If it gets above 5, short gold and buy the XAU (gold bugs index). Vice versa for a ratio below 4. (This is a strategy that is based on studies conducted by John Hussman, a very smart mutual fund manager.)

The price of gold varies, but throughout history it has been used as currency, jewelry and recently in manufacturing. It has value and is not getting noticably cheaper to produce. Investing in gold not speculating on the real future value of gold. It is a bet against fiat currencies holding their value. Honestly, I wouldn't want to place that bet with a single commodity.

I thought that the current surge in the price of precious metals has more to do with the fact that there are ETF's trading in them rather than in some underlying monetary reason.

Dale,

I could be wrong, but if memory serves me correctly, the early-mid 1990s saw gold production costs fall significantly. Gold, for a while, turned out to be noticeably more inflationary than the USD.

Here in Colorado, we know that the real gold in them thar hills is water. Which gets me to thinking - what better investment than in a natural resource that used to be free, but is rapidly becoming a commodity?

Good point, Randy. There are more than a few ranchers and farmers retiring wealthy by selling their water rights. Somebody with staying power might want to take a buy and hold strategy, because it appears that scarcity can only increase.

Shorting gold in the late '70s may have taken a large amount of courage, but there were some people who went long 30 year Treasuries who remain quite happy to this day.

Of course as gold gets cheaper, it will find its way into more an more electronics because of its excellent conductive properites... which will help sustain its continued use, even if at lower prices.

The trouble with water as a commodity or investment is that its value depends greatly on where and when it is delivered, not to mention purity. There isn't one big market for water, but rather thousands of little ones. Water seeping through the walls of my basement in rural Michigan has a negative value, even if it was drinkable. (Not to mention the negative value of undrinkable water washing across New Orleans recently.) Nearly unlimited drinkable water from my 100-foot well costs me only a few cents of electricity a year plus depreciation on the well, and $500 or so to replace the pump every few decades, and it tastes better than bottled water. Enough water to irrigate crops in Michigan would cost a bit more - but you only want it about 8-10 weeks a year, since more water than you want falls from the sky the rest of the time. Enough water to irrigate crops in Colorado might get expensive, but it's still worth something only if it's delivered at the right times. And no farmer could afford to pay the cost of pumping the water from MI to CO.

So, you could get rich off of contracts to deliver water of specified purity to a particular location on a particular date - but you've got to be careful because water that's available elsewhere or on a different date won't fill the need.

Finally, natural events and government action have often screwed over farmers who thought they had an ironclad right to water. If the weather turned drier than it ever has been since we took the country from the Indians, then it's likely that the water just isn't in the river, and your right to draw so much water from it is worthless. Furthermore, in a situation like that there will probably be a government agency intervening to see that enough water stays in the river to keep the fish alive...

Of course as gold gets cheaper, it will find its way into more an more electronics because of its excellent conductive properites... which will help sustain its continued use, even if at lower prices.

Die, myth, die.

Gold is not an "excellent conductor" per se. Conductivity, in order, is: Silver, Copper, Aluminum, then Gold. This still makes gold a better conductor than most other metals, but even if all the copper veins in the known world evaporated tomorrow, aluminum is nearly omnipresent.

What gold does do, better than any of the other three, is resist corrosion. This is why it is sometimes used for plating exposed contacts and connectors in signal-sensitive applications, audio in particular.

As a professional water lawyer, I can assure all budding water speculators reading this blog that the truism about wine is applicable to water: the way to make a small fortune is to start with a large one.

water is delivered to this group, called voters, who for some strange reason absolutely insist that the price remains low. oddly enough, this group wields the power to make it so.

if you absolutely have to invest in water for some irrational reason, buy a utility stock. you'll get a nice safe dividend.

if you want to know more about losing money investing in water, google enron and azurix, or cadiz.

For those adventerous folks looking to speculate in water rights, a little-known (and little-sized) company called PICO Holdings (NAZ: PICO) has a subsidiary called Vidler Water company, which owns zillions of acre-feet of water and water rights in AZ and NV. I don't own the stock, but I keep up with it - very interesting story!

Like any investment vehicle, gold can contribute to well rounded and diversified portfolio. It has its merits. I don't get the hostility to owning it.

Triticle, making the argument today that long-term investors should steer clear of gold and, instead, invest heavily in general equities simply because this was what worked during 1980-2000 would be akin to someone in January of 1980 advocating that investors concentrate on gold and shun the general stock market. After all, in January of 1980 the Dow had proven to be a terrible investment over a long period whereas gold had proven to be a spectacularly good investment (in January of 1980 the Dow was LOWER than it had been 15 years earlier whereas gold, over the same period, was up by more than 2000%).
Over very long time periods each investment class cycles between massive under-valuation and massive over-valuation. During the late 1970s, for example, burgeoning fears of inflation and plummeting confidence in the monetary system caused a spectacular surge in the investment demand for gold and caused stock market participants to assign very low multiples to company earnings and dividends. As a result, the Dow became extremely under-valued in absolute terms and relative to gold. But rather than being a reason to dislike the stock market and favour gold, 15 years of terrible performance by the Dow and great performance by gold resulted in the stock market being priced to yield exceptionally GOOD long-term returns and gold being priced to yield exceptionally POOR long-term returns.

By the year 2000, however, two decades of subsiding inflation fears and growing confidence in the monetary system had led to a situation where there was almost no interest in gold as an investment and where stock market participants were willing to assign phenomenally high multiples to company earnings and dividends. But rather than being a reason to favour the stock market and dislike gold, 18-20 years of terrible performance by gold relative to the stock market had set the stage for at least 15 years of dramatic out-performance by gold. All that was required to set the new long-term Dow/Gold trend in motion was for the long-term trend in confidence to reverse direction; and that happened when the NASDAQ bubble burst.

Gold has entered a new secular bull......be smart and take a portion of your investment capital and invested it in gold.

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